In defence of regulation

Fungai Sibanda

[By Fungai Sibanda] The global economy faces its worst crisis in decades. Though SA has lagged the rest of the world in the slowdown, there is no doubt we have had our fair share of negative consequences.

There are signs, however, that the worst may be over. Recently published GDP figures indicate a deceleration in the rate at which the economy is shrinking.

It is important to recognise that one of the key causes of the crisis was a lack of regulatory oversight in the US financial services sector, stemming from blind faith in markets. Here at home we did not have a financial crisis per se, but rather a real-economy crisis, owing in large part to our robust financial sector institutions and laws.

One of the key results of the crisis is that we may see heightened regulation of various sectors in general and financial services in particular. That is not to say that there is no longer room for markets. Bear in mind that the rationale for regulation or government intervention in the economy stems from market failure — the recognition that, under certain circumstances, markets, if unaided, may not yield optimal results.

Regulation is there to correct imbalances caused by the market system, sometimes to the benefit of the private-sector participants, too. In the absence of regulation, firms would not invest in processes that result in external benefits to society. Joseph Stiglitz, during his recent visit to SA, said in as much as markets may not be self-correcting, there may also not be self-directing. At the heart of the matter, though, is how to regulate optimally.

Consider a three-legged pot. One leg represents rule-making, the second enforcement and prosecution, and the third adjudication.

Let’s begin with rule-making. In terms of the Electronic Communications Act, the Independent Communications Authority of SA (Icasa) is empowered to prescribe certain regulations.

I did a quick scan of how many regulations needed to be prescribed in terms of the act and I counted almost 25. This excludes regulations prescribed under repealed legislation, which the act says need to be repealed or amended as Icasa deems necessary.

The mandate to formulate regulations is not a light one, considering that other regulators in most instances neither draft any regulations, but rather have to implement laws and regulations passed by the legislature and the executive respectively, nor do they have any adjudicative function. Icasa, on the other hand has to develop regulations, implement them and play an adjudicative role as well in certain instances. This is a mammoth task that needs acute focus and streamlined processes.

The art of drafting regulations is specialised, one which not everybody who has a law degree can simply undertake. A key aspect for the rule-making level is that quality regulations are developed.

Though Icasa is under immense pressure to develop all the regulations that need to be prescribed under the act, it is perhaps under even more pressure to ensure that it produces quality regulations. This is not an easy task, especially when faced with an industry that revels in its 4D strategy of delay, deny, debate and deliver.

A number of Icasa regulations get taken on review, usually not because operators are sincere about the concerns but too often as a simple strategy to delay their implementation.

Rule-making is not a perfect science and therefore no regulation can be expected to be perfect. However, there are basic requirements that every regulation needs to fulfil in order to pass muster. These can be grouped into two broad categories of, using the lawyers’ language, procedural issues and substantive issues.

From a procedural perspective, Icasa has a duty to take procedurally fair administrative action as required by our constitution, the Promotion of Administrative Justice Act, the Electronic Communications Act and the Icasa Act. This requirement ensures that the people or interest groups that are affected by a particular regulation or decision are afforded the opportunity to air their views and influence the process.

This requirement, however, does not mean that every view must be accommodated. Rather, it is enough that Icasa must demonstrate that it has given the affected party an opportunity to express their views and that, in arriving at a decision, those views were considered and given thought.

There is no reason why Icasa should not accommodate well-reasoned and justifiable views. We saw with the licence-fee regulations that most industry views were accommodated to the point of changing the whole rationale and methodology of levying licence fees. We now have a licence fee framework that is sensitive to the economic cycle of boom and bust, requires only profitable operators to pay licence fees and is in line with government policy on small businesses, by exempting small operators from paying licence fees.

From a substantive perspective there is greater need to ensure that regulations are underpinned by quality research and concrete evidence. In a bid to improve the quality of laws and regulations developed, more and more countries are beginning to employ regulatory impact assessments or analysis, better known as RIA.

RIA is a means of appraising the costs and benefits of proposed regulation and evaluating the performance of existing ones. It is a systematic ex ante estimation of the effects of regulatory proposals. A RIA assists in the establishment of regulatory legitimacy and the assurance to government, business, consumers and stakeholders of the logic of regulatory decisions.

The use of RIA helps policy makers to ask what may seem as trivial and obvious questions such as is there a need for this law? Will it meet its objectives? Is it the most cost-effective method of protecting the public interest? Is there a least cost alternative to this regulation? Will it have unintended side effects? What are the likely benefits of this law? What about the costs to firms or society? How would the regulation affect the supply of a particular service? How will it affect service prices and quality? RIAs can also be used as processes that contribute to better governance, by improving transparency and the accountability of public decision-making.

I am happy to say that one of the projects that Icasa has in its business plan this year speaks to the incorporation of RIA into our regulation making process. I can therefore confidently predict that once adopted, RIA will assist Icasa to ensure that its regulations, among other things, are: stable and predictable and proportional to the problem at hand; compliable and enforceable; effective; consistent and coherent with the whole body of legislation; simple, clear and transparent; founded upon careful consideration of all relevant facts, interests and alternatives; and easily accessible to the public.

Once Icasa has put in place all the necessary regulations, its focus should then shift to enforcing compliance, undertaking investigations and prosecuting offenders. This is the second leg of the pot. You will notice that almost all regulations have a contraventions and penalties section that outlines the sanctions that will be imposed by the authority for any breaches of the law.

Though industry is quick to point to the compliance costs of regulation, and regulation does come at a cost, no-one ever mentions or dares estimate the cost of noncompliance. Just spare a thought and think about the impact on the economy, consumers and society at large of operators in the electronic communications industry ignoring regulations on, say, quality of service.

In as much as regulation imposes compliance costs on operators there are also benefits to society at large, private firms included, that come with regulation. For instance by improving the quality of your service, not only do you improve consumer welfare but you can also use that as a competitive tool against your rivals.

As a matter of fact as the industry matures, high service standards become a norm. In the meantime, the authority requires operators to publish various statistics relating to their grade of service. Such information will be published so that consumers are empowered through information dissemination and likewise are able to make informed choices when they transact in the market place. Why for instance would a consumer stick with an operator whose dropped call rate is 5% when another operator drops less than 1% of its calls?

An important element of the investigative/compliance and prosecutorial leg is adequate capacity. These regulations and the Electronic Communications Act will not mean much if the authority is not able to monitor compliance. It is therefore critically important that the authority is adequately resourced to achieve this mandate.

At the adjudicative level, the Icasa Act establishes a complaints and compliance committee as an independent committee of the authority tasked with adjudicating complaints and dealing with instances of noncompliance.

Though the CCC, as it is commonly referred to, is meant to be a quasi-judicial structure, I believe that its mandate can be enlarged to become a fully fledged tribunal with adequate capacity to deal with all manner of cases in the industry, especially those involving a review of the decisions of the authority.

The fact that communications cases are dealt with by ordinary courts is very often a cause for concern, due to the length of time it takes to resolve them. Though the case is at the courts, Icasa suspends the implementation of that particular regulation, with obvious negative results for the public interest.

Underpinning the three legs is the ability of Icasa to carry out its rule making, investigative and adjudicative functions without fear or favour. This is the hallmark of an independent regulator.

It is critically important that we have institutions that execute their tasks and make decisions without external pressure or influence; are accountable, that is, they can justify and account for actions and decisions to the general public and the industry concerned; are transparent, that is, they make decisions in a manner that is open to public scrutiny with all relevant stakeholders free to participate in the decision making process; and are consistent in applying rules, that is, apply them in a uniform and predictable manner.

  • Sibanda is an Icasa councillor
  • This is an edited extract of a speech delivered at the Internet Service Providers’ Association’s annual iWeek conference
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  • Matthew French

    Interesting insight into the thinking at ICASA. And quite scary.

    It is built on the extremely shaky premise that regulation is a good thing. Despite the fact that South Africa is awash with examples where regulation has not fixed the problem it was intended to resolve, and at times has made things worse.

    There are many who would argue that the global financial crisis was because of regulation, not despite it. The crisis happened in the era of Sorbanes-Oxley, and some of the first casualties were those lending institutions created by legislation to provide sub-prime lending.

    ICASA has a dismal track record with regulation. On issues where regulation could help – such as quality of service, open access, digital terrestrial television and interconnect rates – they have a lot of work to do. When it came to enforcing regulation, they were bludgeoned into silence by expensive corporate lawyers.

    ICASA is also an excellent example of why having a regulator is problematic. Political meddling and lack of capacity made the organisation moribund for several years. This held an entire industry back – the industry it was supposed to benefit.

    Regulation is a blunt weapon: it should be used sparingly to ensure industry participants compete fairly and equitably, and to manage scarce resources like radio spectrum. It should not be used to promote political agendas, to protect cronies or incumbents, or to mould an industry to the whims of an ephemeral politician.

    I have plenty of sympathy for the enormous challenges ICASA has ahead of it. But I think their first priority should be to reduce the amount of regulation they are responsible for.

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